Thursday, November 18, 2010

Vulture Fund dodges UK debt relief law in Jersey court

Guest blogger: Nick Dearden, Jubilee Debt Campaign

A court in Jersey has awarded a ‘vulture fund’ $100 million on the basis of a defaulted debt ‘owed’ by the Democratic Republic of Congo, allowing the fund to get around a British law which would prevent such action being taken. In other words, Jersey’s court has provided a loophole which has allowed a particularly unpleasant company to make money from one of the world’s poorest countries.

So-called ‘vultures funds’ buy up defaulted debt from developing countries for small amounts of money and then sue those countries for the face value of the debt – often adding extortionate fees and interest charges.

FG Hemisphere is one such fund, and has been pursuing a debt run up during the rule of dictator Mobutu Sese Seko in the 1980s. It was awarded payment a few years ago and is now busy going around the world trying to enforce its claim against companies with connections to DRC. Long-term investment in DRC is hampered as a result.

The original debt, which FG Hemisphere bought in 2003, was for $37 million. It has now risen to more than $100 million in principal, interest and fees, and is growing by around $27,500 a day, according to Jersey Court of Appeal documents seen by Bloomberg.

By rights this debt should have been written off as completely illegitimate – even the IMF’s own consultant in DRC told the institution to stop lending in 1978 because there was “no (repeat, no) prospect for Zaire’s creditors to get their money back in the foreseeable future”.

Fortunately much of DRC’s debt has been written off – at long last – today. The Paris Club of creditors has cancelled $7.4 billion on the grounds it was unpayable.

After a campaign by NGOs earlier in the year, the British Parliament passed a law just a day before Parliament dissolved for the General Election which would effectively make the actions of companies like FG Hemisphere impossible – insisting they take the same discount that the World Bank and IMF are taking on the debts of countries like DRC. However, because Jersey has not (yet) incorporated the law, DRC is still being harassed by the vultures there.

As such, FG Hemisphere won a judgement ordering Jersey-based mining company GTL to send “all future payments” on a mining contract with DRC’s state-owned Gecamines to FG Hemisphere. Gecamines Director General Calixte Mukasa told Bloomberg the decision was “incredible and revolting” and said the company will appeal.

The very existence of vultures provides one more reason why ‘secrecy jurisdictions’ are a problem. Vultures are almost always set up in such jurisdictions – British dependencies being a particular favourite – as they provide the perfect cloak for investors in such funds and help protect them if things go wrong.

It is vital that Jersey incorporates the vulture law if the island is not to continue being used by some of the most reprehensible companies in the world. Moreover, the British government needs to make the law permanent across the UK – it is currently under threat from a sunset clause which could mean the UK Government reverses the law next year.

5 Comments:

The vulture fund in question is not incorporated in Jersey - Jersey law matches British in forbidding them from setting up here. However, Jersey law does not (yet) forbid vulture funds based in other jurisdictions (in this case, New York) from sueing for payment through the Royal Court.

You might as well ask, though: why is a Congolese mining company operating through a company in Jersey? Surely that's what raises the legitimate questions about secrecy jurisdictions.

I have a question myself of the issue of Jersey not incorporating vulture funds though - how does it manage to do this? How does it define a vulture fund? Vulture activity can be undertaken by all manner of companies. Normally you only know they are vulture funds when they take a case to court.

Links to this post:

About Me

The Tax Justice Network (TJN) is an international, non-aligned network of researchers and activists with a shared concern about the harmful impacts of tax avoidance, tax competition and tax havens.
www.taxjustice.net